National Public Finance Guarantee Corp. vowed to defend its rating after S&P Global Ratings placed the MBIA Inc. municipal bond insurer on credit watch negative, while some analysts criticized the rating agency's move as unnecessary and potentially damaging to the industry.
In announcing the credit watch on Build America Mutual and National on Tuesday, S&P said the review may lead to a downgrade of both insurers and that the process will take three months. BAM carries an AA rating from S&P, while National is rated AA-minus. Assured Guaranty Ltd., the largest of the three active bond insurers by market share, is also rated AA. National said in a statement Wednesday that the rating agency's decision was unwarranted, and that it planned to engage with S&P to prevent a downgrade during the review period.
“We are disappointed by S&P’s announcement and do not believe that a rating downgrade of National is warranted," said Bill Fallon, MBIA’s chief operating officer and National’s chief executive officer. "National’s financial strength is evidenced by $1.7 billion of excess capital above our estimate of S&P’s AAA requirement. National has also, in a relatively short period of time, significantly increased its new business activity, as measured both by insured par amount and transaction count, as well as the number of intermediaries who have recommended purchase of National’s guarantees. This market acceptance has been growing despite an environment where S&P’s rating on National has been one notch lower than its competitors."
"The strong trading value of National’s wrap further attests to the success of National’s disciplined re-entry into the municipal bond market.” Mr. Fallon added, “We will continue to work with S&P during its ongoing review to do everything in our power to maintain National’s AA- credit rating.”
BAM previously responded to the decision, saying it represents a departure from S&P's stated criteria and previous communications to the market. BAM executives also said they would work with S&P to prevent a downgrade.
S&P said Tuesday it did not expect to lower BAM's rating by more than one notch or National's by more than three notches.
Buyside analysts said the insurers’ future business and marketability could be hurt depending on the severity of further negative credit actions, and that rating agencies are putting too much unnecessary scrutiny on insurers.
Further credit action would hurt the insurers’ business in general – but the impact would be more painful in the case of a multi-notch downgrade, Alan Schankel, managing director at Janney Capital Markets in Philadelphia, said in an interview on Wednesday.
“I do not think a downgrade for BAM is a forgone conclusion, since they do have significant market share of new issue business, but if BAM was downgraded to AA-minus, I suspect they could continue to write new business,” he said.
Schankel said National’s situation is more concerning, since it has been largely unable to underwrite new business. “A three-notch downgrade to A-minus would make further progress on the new business front untenable,” he said.
Further negative credit implications will also effect competition for business and market share, since the value a bond insurer provides in the market is based on its rating, David T. Litvack, managing director and head of tax-exempt research at U.S. Trust, Bank of America Private Wealth Management said.
“One downgrade can initiate a downward rating spiral and potentially cause the bond insurer to suspend writing new business,” Litvack said. “Bonds insured by a low-rated or non-rated insurer are likely to lose their marketability if the underlying credits are also of low quality.”
Litvack said S&P’s action demonstrates the value of underlying credit analysis.
“Investors in bonds with strong underlying credit quality should not be overly concerned if the bond insurer is downgraded, since the bond will continue to be rated at the higher of the underlying or insured rating,” he explained.
He said bond insurance provides more meaningful protection for weak underlying credits than bonds with strong underlying credit.
“For those investors in bonds with weak underlying credit, S&P’s CreditWatch is a real concern, because bond insurer downgrades can become self-fulfilling prophecies,” Litvack said.
Others said rating agencies should stick to analyzing insurers’ claims-paying ability – and not increase unnecessary pressure on those companies.
“I am very wary when bond rating agencies start to make ratings assessments based on their evaluation of business prospects as opposed to ability to pay,” said John Mousseau, executive vice president and director of fixed income at Cumberland Advisors Inc.
“They have moved from bond rating to stock rating service,” he said.
He said putting pressure on insurers hasn’t worked well in the past, referring to the time frame leading up to the subprime mortgage crisis, the nationwide banking emergency that led to the recession of 2007 to 2009. The debacle was largely caused by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities.
“This is very similar as to 13-14 years ago when the rating agencies put downgrades, or threats of downgrades, on the insurers to expand their business lines -- and they did -- into mortgage backed securities,” Mousseau said.
